Monday, July 25, 2011

Banking Insider: Chris Sieroty

Lenders say newly mandated swipe fees will drain revenue

You might not have paid close attention to the battle between banks and merchants over debit cards, but you’ll likely notice the outcome in your wallet.

The dispute was over debit card interchange fees — the payment merchants make to banks to process customer transactions. In 2010, the Wall Street Reform and Consumer Protection Act required the Federal Reserve to ensure that the fee was “reasonable.”

The Fed settled on a maximum fee of 21 cents plus 0.05 percent of the transaction amount, which works out to about 24 cents on the average debit purchase.

The new limits are much lower than the current swipe fee average of 44 cents per swipe. That cap applies only to debit transactions and not credit cards.

Rules regulating the interchange market exempted financial institutions with less than $10 billion in assets. Those with more than $10 billion in assets, including JPMorgan Chase & Co. and Bank of America Corp., will see interchange fees capped.

The cap is scheduled to go into effect Oct. 1. In preparation, some of the nation’s largest banks and most recognizable brands in Las Vegas have scaled back or eliminated rewards and free checking.

Many of the same banks have argued the cap would lead to multibillion-dollar losses in revenue, which would hurt their ability to lend to small businesses.

Bank of America has warned that the new regulation will cost it $1.8 billion to $2.3 billion annually. Wells Fargo just increased its estimate of the after-tax impact of lower fees to $325 million per quarter, or $1.3 billion annually, up from a previous estimate of $250 million.

Gary Kishner, a JP Morgan Chase spokesman, attributed the bank discontinuing its debit card rewards program and revamping its free checking accounts to the Fed’s decision.

He said the cap on fees could cost the bank about $1.3 billion annually.

Interchange fees collected last year were worth about $16.2 billion, roughly 80 percent of which went to the 10 largest U.S. banks, including Bank of America and Chase.

For now, smaller community banks will receive the same fee they have been receiving. The price setting of interchange fees will ultimately harm local banks.

Hanan Sabri, consultant to Service 1st Bank of Nevada, noted that demand deposit accounts are the central product offered by both large and small banks, and that debit cards allow smaller banks to offer their customers the same global transaction service that big banks provide.

“Every decrease in the fee means less revenue for us. The larger financial institutions have the ability to absorb the new fee rates,” Sabri said. “It could have an impact on a bank’s ability to lend money. It is an income loss for the bank.”

She said in the long run a two-tier interchange system would not work. Such a system places community banks at a significant disadvantage to large institutions, as merchants will be less willing to accept their higher-priced cards.

Although the new rules exempt Service 1st Bank of Nevada and other similar-sized institutions, the American Bankers Association said that competition will force community banks to offer the same fees as the large banks.

Over time, marketplace dynamics will align or merge the two tiers, severely harming consumers, community banks and the electronic payment system. Debit interchange revenues enable community banks in Nevada to provide consumers with a variety of free debt card products and services, as well as free checking.

“We are deeply troubled that the Fed did not include specific enforcement provisions in the final rule to ensure community banks receive the benefit of the statutory small-bank exemption designed to insulate the nation’s more than 7,000 community banks and their customers from decreases in interchange revenue and the subsequent increases in customer fees over time,” said Sal Marranca, chairman of the Independent Community Bankers of America.

Marranca said instead of price caps, the Independent Community Bankers of America supports set standards for determining whether interchange fees are reasonable and proportional by permitting interchange fees that cover all allowable issuer costs — including fraud prevention and fraud losses — plus a reasonable rate of return.

Sabri declined to discuss debit card transactions or revenue earned by those transactions.

But, a midsized bank, for example, that handles 16 million debit-card transactions each year, would generate $4.6 million in revenue, based in total card sales volume of $600 million on 140,00 debit cards.

That is equivalent to less than $3 per month per card, according to the American Bankers Association.

Sabri said no one really knows the impact of the new interchange fees, since they do not take effect until October. But, she cautioned that bankers are going to want to look at their books and see how they can make up the losses.

Contact Chris Sieroty at or 702-477-3893.



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